Natural Monopoly

What is Natural Monopoly?

A Natural monopoly meaning refers to a company that dominates the Market because it is the only supplier of a particular product. In other words, the company that enjoys the natural monopoly is the only brand to offer a specific product or service in the given location. This is especially seen in the industries that need special kinds of Raw Materials, unique resources, advanced technology, and the processes that need advanced skills.

Many monopolies use this title to their advantage by acquiring other companies or using unfair practices to keep the competition in a particular location at bay. For a company to be a natural monopoly, it needs to follow fair marketing practices. There could also be collusion when two or more similar companies that offer the same products or services plot together to gain an unfair market advantage. Collusion occurs when two companies that are in the same Industry conspire together to dominate the market. They can increase the price of the product or limit the services they offer.

How Does it Work?

Usually, it starts with a company trying to use the barriers involved in the specific industry to their advantage. They use these barriers to build a protection wall that makes them the only company to sell a particular product in the market. These high barriers are because of the large Capital that no other company in the given location can fund. Examples of the barriers that can restrict the entry of a startup to enter the market are equipment, technology, capital, cash, and other fixed assets.

The producer that offers a particular product at a large scale can become a natural monopoly. This phenomenon is common in the industry where a single large supplier of a product satisfies the requirements of all the customers in the given location. Now that the supplier produces the product at a large volume, there is no need for another company or a small-scale organization to offer the same product. That’s because the cost of producing this product in a small volume will be too high. There is no point in competing with the supplier that offers this product at a low cost. In such a case, the large supplier will not only gain a natural monopoly, but they can offer these services at a reasonable price. They don’t have to use unfair market practices to sell products.

Why are Monopolies Allowed?

Natural monopoly supports one large company that is the only supplier of a particular product or service. Not only do they produce the products at a large volume, but they sell them at a low cost. As the natural monopolies intend to use the industry’s limited raw materials or production techniques and still manage to sell the product at a lower cost than any potential competitors, it is good to have them in the region. The best example of a natural monopoly is the utility suppliers that offer electricity and water to the entire town.